Where has our Caterpillar Gone?

It’s time for an update on Caterpillar (NYSE:CAT), the stock we have been discussing in recent articles. You may remember that there were some great shorting opportunities out of a double top on the big picture, as shown in Chart 1:

You can see on the weekly chart that the move down so far has reached 75% of the range down from the 2011 high but note that it has also moved down from the sideways move it made for several weeks around June.

At an Interactive Trading Workshop this week, we looked at CAT as it had an ABC short trade on the daily chart. I have shown this in Chart 2:

There were several things I liked about this trade. The first was the break below June’s sideways period and below a previous support level of the lows in November and December last year. The class found a price cluster above point A of the trade, which was acting as resistance above our short trade – a good sign. This cluster came from 100% multiples of several different lows and 75% of the All-Time-High. I have shown two of these in Charts 3 and 4.

With that price cluster above point A, there were definitely price reasons for taking this trade. Tuesday trading saw an outside day fill any short orders and then subsequently stopped them out on the same day. We call this a “bad” outside day!

So where to from here? The price resistance above point A still exists so another short opportunity may yet present itself and so further stalking of this market is required. We might even see that price cluster challenged by small double top but until point A is clearly taken out, I wouldn’t be looking to go long.

Markets sometimes have an annoying habit of kicking us out of trades and then continuing without us. Time will tell if that is the case in this scenario and it is too early to give up on what is otherwise looking like a great setup. Keep stalking for another opportunity until the market gives you a setup or proves to have moved out of that pattern.